Originally posted on sciy.org by Ron Anastasia on Sun 11 May 2008 02:00 AM PDT
Nouriel Roubini's Global EconoMonitor
Effects of the US recession on Asian growth
In the last few day I have been at the Asian Development Bank meetings in Madrid and then visited Hong Kong and China. I have presented my view on the severity of the US recession and its potential effects on economic growth in China and Asia. Will this region decouple from the US economic contraction?
The answer depends on the severity of this recession. If the US recession is short and shallow (a V-shaped recession lasting six months) then there is enough of a domestic growth dynamics in the rest of the world and in Asia that the global economic slowdown would be very modest. But if the recession is more severe (a U-shaped recession lasting 12 to 18 months) then that US contraction, together with the sharp slowdown in the other G3 economies (a good fraction of the EU could be soon in a recession - specifically UK, Spain, Ireland, Italy and Portugal - and the rest of the EU is sharply slowing down; while Japan is also headed towards a recession) will negatively affect growth in China and Asia, much more than currently expected by macro analysts and markets. Direct and indirect trade channels, financial channels, credit crunch channels, dollar weakness channels and confidence channels would lead to a signifcant slowdown of growth in Asia.
Here are three media reports of my views on the US and its effects on Asia:
| China not immune from U.S. recession, says economist NYU's Roubini sees slide in GDP growth to single digits; value of yuan to be kept low May 8, 2008
(Reuters)—The United States is heading for a severe recession that could cause China’s economic growth to slide to 8% and make Beijing less willing to let the yuan appreciate, U.S. economics professor Nouriel Roubini said on Thursday.“Downside risk to growth will emerge in China because of the U.S. recession,†Mr. Roubini, economics professor at New York University’s Stern School of Business, said at a business lunch in Hong Kong on Thursday.“If exports and growth slow, the willingness of China to let the yuan appreciate will be less.â€Mr. Roubini, who is chairman of the economics Web site, RGE Monitor, believes the United States is already in a recession that will last until the middle of next year.While U.S. gross domestic product grew 0.6% in the first quarter, that was due to a build-up of unsold goods, masking an underlying recession as residential and non-residential investment and corporate capital expenditure are falling and total employment has declined for four consecutive months, he said. The U.S. housing recession is the worst since the Great Depression and house prices, which have fallen 15% from their peak, could be down 30% from the peak by the end of 2010, he said. That will hurt consumption, and once the recession becomes evident, there will be defaults on bonds and corporate and personal loans. The severity of the U.S. slump will, in turn, trigger a recession in Japan and in parts of Europe as housing bubbles have burst and a strong euro hurts exports. In Asia, weak global demand will cause a severe economic slowdown, though not a recession, as exports and financial markets are hit, he forecast. China is cushioned by domestic demand and should avoid a hard-landing, but it will still see economic growth slide to 8% or slightly below, Mr. Roubini said, ending four years of more than 10% growth. Jonathan Anderson, China economist at investment bank UBS, is more upbeat, telling reporters this week that China’s economy is on course to grow 9.5-10% this year and 9-9.5% in 2010. “Exports to the U.S. are already quite slow but exports to Europe have been accelerating,†Mr. Anderson said. “Domestic demand is still strong, so China should hold up.†Mr. Roubini said China’s unwillingness to let its currency appreciate during an economic slowdown could help prevent a collapse of the U.S. dollar. “The risk of a collapse of the U.S. dollar is limited because demand from sovereign wealth funds is strong and if (China stopped buying U.S. dollar assets) the yuan would rise,†he said. Mr. Roubini said further interest rate cuts will enable the United
States to emerge from recession by mid-2009, by which time the
benchmark U.S. federal funds rate could be 1% or lower.
|
| A new message of economic doom
by Tom Holland, South China Morning Post |
| As
the global credit crisis has unfolded, few forecasters have been closer
to the mark than New York University economics professor Nouriel
Roubini.In July last year, when United States Treasury Secretary Henry
Paulson was still insisting the subprime fallout had been contained,
Professor Roubini, who also heads his own research firm RGE Monitor,
warned the bursting of the US housing bubble would lead to a severe
credit contraction. Within weeks the crunch had begun to bite, leading
to the collapse of British mortgage lender Northern Rock in
September.
Then in February this year, Professor Roubini published a paper in which he warned of a "financial meltdown" in which "one or two large and systemically important broker dealers" could go bust. One month later, Bear Stearns imploded. So the audience was all ears yesterday when a select group of Hong Kong's investment community gathered in the Mandarin Hotel to listen to the professor's predictions for the US economy. They weren't pleasant. Although the immediate risk of a financial system meltdown may have been averted by the rescue of Bear Stearns, Professor Roubini warned that anyone now heaving a sigh of relief is dangerously complacent. For a start, he argued that the US economy is already in recession. The 0.6 per cent growth recorded in first-quarter gross domestic product is misleading, he said. Final demand is already falling and the only thing keeping the GDP figure in positive territory is a heavy build-up of inventories of unsold goods. That will be paid for in the coming months as companies scale back production while they try to shift accumulated stock. Nor will this recession be as short and shallow as the downturns of either 1991 or 2001. With home prices down 15 per cent from their July 2006 peak, the US is already in the middle of its worst housing slump since the Depression of the 1930s. And with the stock of unsold new houses still rising, Professor Roubini argued that prices may not bottom out until they have fallen 30 per cent from their high. A fall of such magnitude would wipe US$6.6 trillion off household wealth, plunging 40 per cent of all mortgage borrowers into negative equity. Even if home prices only fall 20 per cent, with half the underwater households defaulting and lenders recovering 50 cents on the US dollar, the losses inflicted on the financial system will be an enormous US$1 trillion, equivalent to 75 per cent of US banks' capital. "The potential risk for the financial system would be huge," warned Professor Roubini. "A significant number of institutions could go belly up." That's not all. The 2001 recession was centred on company investment, which makes up only 10 per cent of the economy. This time around, it is individual spenders who are in trouble, and they make up a whopping 70 per cent of GDP. With consumers already up to their eyeballs in debt and unable to raise any more cash by remortgaging their homes, private sector employment stalling, and credit card and car loan defaults rising, consumer spending looks sure to contract nastily. That, in turn, will hit the commercial real estate market hard, especially in the retail sector. And although US corporations are by and large in good shape, Professor Roubini points out that following the private equity buyout boom, there is a significant "fat tail" of highly leveraged companies which will soon begin to look very exposed. Over the past two years, the default rate on corporate bonds has been just 0.6 per cent. That now looks set to rise towards the historical average of 3.8 per cent, and possibly towards the 10 per cent rate seen in typical recessions. At the same time, recovery rates will drop from 70 cents on the dollar now to a typical recession rate of about 35 cents. That threatens to punch a gaping hole in the US$62 trillion market for credit derivatives. A number of protection-sellers - investment banks and hedge funds - will go to the wall, leaving buyers who thought they were hedged bearing losses of another US$200 billion to US$250 billion. Meanwhile, municipal governments will see their revenues from property and sales taxes evaporate and they too will start to default, inflicting yet more losses on hapless lenders. Of course, faced with such a grim scenario, the US government would be forced to act, possibly by buying up mortgages or simply by printing money. Even so, says Professor Roubini, the resulting recession will last a painful 12 to 18 months, twice as long as either of the two previous downturns. Inevitably, such a long and deep slump would have a grievous effect on economies in Asia, but more of that another day... |
| Worst ahead of US: subprime seer |
| Venkatesan Vembu/ DNA MONEY |
| Friday, 09 May , 2008, 08:30 |
| Hong Kong: In early
2006, economist Nouriel Roubini broke rank from the prevailing
consensus opinion and blew the whistle on the US housing bubble and
held out grim warnings of a US ‘recession’.
That contrarian bearish outlook has been proved spectacularly right two years later, and Roubini, a former White House aide and chairman of the Roubini Global Economics Monitor, is justifiably credited with having first ‘called’ the sub-prime crisis. “It was pretty obvious to me then that a housing bubble was building up and would soon burst,†Roubini said in response to questions from DNA Money in Hong Kong on Thursday. “I’m not sure why the others didn’t see it... With a bubble, there’s always wishful thinking, and people believe it will go on forever.†Today, the consensus opinion grudgingly concedes that the US economy is tottering on the brink of a recession, but comforts itself with the hope that it will be “short and shallowâ€. It draws solace from US GDP figures for the first quarter of 2008, which recorded 0.6% growth. But Roubini’s bearish view is no less diminished. “The worst is ahead of us rather than behind us,†says the author of ‘Bailouts or Bail-ins? Responding to Financial Crises in Emerging Economies, Political Cycles and the Macroeconomy’. The US housing recession - the worst since the Great Depression — “is nowhere near the bottom, and US home prices will fall for another two or three years.†And, worse, he notes, it’s effect has spread to the rest of the economy. But the markets are still in denial, says Roubini. “Until March 2008, the (US) markets were reacting negatively, but since then there’s been a bit of a rally. I call this a bear market sucker’s rally, born of the hope that the US Federal Reserve Board’s policy of monetary easing will prevent a recession or at least make it a shallow one.†But when people realise that the real economy is contracting, there will, he warns, be “more severe downturns in the equity marketâ€. In Roubini’s estimation, the US recession will last 12 to 18 months - and it will have a contagion effect in Europe and in Asia as well. “If the US recession were short and shallow, the slowdown in Asia may have been modest. But conditional on a severe US recession, we will see an economic contraction in Japan, and a recession in some parts of Europe... And if most of the advanced economies are in recession or growing weakly, the negative effect on Asia - in terms of trade and financial consequences - will be severe,†he says. There will be a “significant slowdown of growth - more than the markets are pricing in this part of the world.†Beneath the US first-quarter GDP figure - of a 0.6% growth - “the details are ugly and in fact confirm that the US is in recession,†says Roubini. That’s because inventories of unsold goods added an artificial 0.8% to growth. “If that’s taken away, the actual aggregate demand - the actual measure of growth of true demand - fell in the quarter to minus 0.2%. And the build-up of inventories means the fall in GDP in the second quarter will be larger than otherwise as firms will have to reduce that large inventory of unsold goods via a further reduction in production and employment…†Roubini believes that the Fed, which called a pause to its policy of monetary easing, may have to lower interest rates further. “The chances of that are actually very high. The market actually expects the Fed to start raising rates by the end of the year, but in my reckoning, the Fed’s pause will be very short. The chances are they’re going to cut rates yet again.†But grim though Roubini’s outlook is, he does not foresee a period of protracted economic stagnation similar to Japan’s experience of the 1990s. “Japan waited almost two years after its asset bubble collapsed to ease monetary policy and provide a fiscal stimulus, whereas in the US both steps came early.†Under license from www.3dsyndication.com |
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